Based on the five District Bank surveys for the manufacturing sector in October, it is hard not to reach the conclusion that the ISM Manufacturing Index will remain below the 50-mark for a third month in a row when it is reported at 10:00 ET on Friday, November 1. However, the door is ajar for an upside surprise.
The headline indexes for the five surveys were mixed. The New York Fed’s general business conditions index, Philadelphia Fed’s general business conditions index, and the Dallas Fed’s current business activity index are measures of sentiment in response to a specific question, while the Richmond Fed’s Composite Manufacturing Index and the Kansas City Fed’s Manufacturing Index are calculated from index components. As such, these measures are not entirely comparable to each other and to the ISM index.
The overall tone of the indexes ranges from soft to mildly expansionary. The two indexes that have the strongest correlation with the ISM Manufacturing Index moved in opposite directions for October. Pivotal to any improvement for the factory sector will be new orders. While these are not absent – particularly for Philadelphia and Richmond – the broader manufacturing environment is experiencing flat or uneven orders at best, and weaker orders more generally.
The Philadelphia index – which has a correlation of 0.834 – fell 6.4 points to 5.6 in October putting the trend for activity down for a third month in a row and leaving its expansion at a modest level. The Richmond index – which has an even stronger correlation of 0.854 – jumped 17 points to 8 in October from -9 in September. Since the Richmond measure has been swinging wildly between firmer and softer reading of late, I would not interpret this as a fundamental upturn for manufacturing. Nonetheless, the Richmond District has manufacturing sector that is fairly representative of the mix across the US and the potential that is signals a better month for the ISM data should not be ignored. My bottom line is that the ISM Manufacturing Index may not sink lower from the 47.8 in September and could even rise a bit while remaining in recessionary territory.
I reach a similar conclusion when looking at the calculations for the ISM equivalent indexes for the five District Bank surveys. The Richmond-ISM equivalent hints at a rise above the 50-mark for the ISM index, whereas the Philadelphia-ISM equivalent suggests some downward movement. On net, the five surveys point to weakening while two indicate some improvement.
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